Skilled migration and business cycle dynamics

Shocks to net migration matter for the business cycle. Using a structural vector autoregression and an estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy, we find that migration shocks make an important contribution to the volatility of per capita GDP. Migration shocks contribute to variability in per capita consumption and investment, and to residential investment and real house prices. Despite the role of migration, other shocks remain more important drivers of these expenditure components and of housing market volatility. In the DSGE model, the level of human capital possessed by migrants relative to that of locals materially affects the business cycle impact of migration. The impact of migration shocks is larger when migrants have substantially different levels of human capital relative to locals. When the average migrant has more human capital than locals, as seems to be common for migrants into developed economies, a migration shock has an expansionary effect on per capita GDP and its components.